Thursday, January 31, 2013

Friday: Jobs, ISM Mfg, Construction Spending, Auto Sales and more

by Bill McBride on 1/31/2013 08:56:00 PM

Earlier I posted Employment Situation Preview. I argued some of recent employment indicators suggest a more positive report. Here are some other views:

From CNBC: Market Braces for a Blah Jobs Report as Firms Hold Back

Economists expect 160,000 non-farm payrolls were added in January and the unemployment rate stayed unchanged at 7.8 percent, according to Thomson Reuters.
From Neil Irwin at the WaPo: What to expect from Friday’s jobs report

And an Interesting Anecdote from Tim Duy:
One of the more interesting anecdotes I picked up last week was from a businessman who said that after his firm issued the first paychecks of the year, virtually every employee came to the payroll office and asked why their paychecks were lower, evidently unaware that the payroll tax cut had expired.

If the expiration does come as a surprise to a large proportion of the workforce, perhaps consumer spending in the first quarter will be somewhat softer than current estimates. Something to watch for.
Friday economic releases:
• At 8:30 AM ET, the Employment Report for January will be released. The consensus is for an increase of 185,000 non-farm payroll jobs in January; there were also 155,000 jobs added in December. The consensus is for the unemployment rate to decrease to 7.7% in January.

Note: As usual, the January report will include revisions. From the BLS: "the Current Employment Statistics (CES) survey will introduce revisions to nonfarm payroll employment, hours, and earnings data to reflect the annual benchmark adjustment for March 2012 and updated seasonal adjustment factors. Not seasonally adjusted data beginning with April 2011 and seasonally adjusted data beginning with January 2008 are subject to revision."

For the Household survey, from the BLS: "Effective with the release of The Employment Situation for January 2013, scheduled for February 1, 2013, new population controls will be used in the monthly household survey estimation process."

• At 9:00 AM, The Markit US PMI Manufacturing Index. The consensus is for an increase to 55.5, up from 54.0.

• At 9:55 AM, Reuter's/University of Michigan's Consumer sentiment index (final for January) will be released. The consensus is for a reading of 71.5, up from 71.3.

• At 10:00 AM, the ISM Manufacturing Index for January. The consensus is for PMI to be unchanged at 50.7%. (above 50 is expansion).

• Also at 10:00 AM, Construction Spending for December. The consensus is for a 0.8% increase in construction spending.

• All day: Light vehicle sales for January. The consensus is for light vehicle sales to be at 15.3 million SAAR in January (Seasonally Adjusted Annual Rate) unchanged from the December rate. Usually I post a graph around 4 PM ET.

LPS: Fewer Delinquencies in 2012, Highest level of Mortgage Originations since 2007

by Bill McBride on 1/31/2013 05:05:00 PM

LPS released their Mortgage Monitor report for December today. According to LPS, 7.17% of mortgages were delinquent in December, up from 7.12% in November, and down from 7.89% in December 2011.

LPS reports that 3.44% of mortgages were in the foreclosure process, down from 3.51% in November, and down from 4.20% in December 2011.

This gives a total of 10.61% delinquent or in foreclosure. It breaks down as:

• 2,031,000 properties that are 30 or more days, and less than 90 days past due, but not in foreclosure.
• 1,545,000 properties that are 90 or more days delinquent, but not in foreclosure.
• 1,716,000 loans in foreclosure process.

For a total of ​​5,292,000 loans delinquent or in foreclosure in December. This is down from 6,192,000 in December 2011.

This following graph from LPS shows the total delinquent and in-foreclosure rates since 1995.

Delinquency Rate Click on graph for larger image.

Even though delinquencies were up slightly in December, it was mostly seasonal. From LPS:

The December Mortgage Monitor report released by Lender Processing Services and covering performance data for the full 2012 calendar year, found that while mortgage delinquency rates remained at elevated levels, they have shown steady improvement, ending the year 32 percent lower than the January 2010 peak. Additionally, following a year of regional improvement in foreclosure inventories (marked by stark contrasts between judicial and non-judicial foreclosure states), the national foreclosure inventory rate began to decline toward the end of 2012 from historic highs experienced during the crisis.
LPS also reported:
“Though still a long way off from the historic level of originations that preceded the mortgage crisis, 2012 was the strongest full year of originations we’ve seen since 2007,” [LPS Applied Analytics Senior Vice President Herb Blecher] said. “Volumes were up approximately 34 percent year over year, with about 8.6 million new loans originated. And, while the majority of these new loans were government-backed – 84 percent in 2012 as compared to just over 50 percent at the peak – the trend over the last four years does suggest a slowly resurgent non-agency lending market.”
LPS Mortgage MonitorThe second graph from LPS shows negative equity. From LPS:
[T]his month’s Mortgage Monitor also found that 2012’s appreciation in home prices has helped to improve the U.S. equity situation and create even more refinance opportunities:

• Overall, negative equity is down 35 percent since the beginning of the year.

• Nearly 4 million loans that were below conforming loan-to-value (LTV) thresholds for refinancing last year would meet those standards today.

• An additional 3.4 million loans that are on the cusp of conforming loan-to-value thresholds stand to benefit, if the home price situation continues to improve.
This means more borrowers can either refinance or sell their homes.

There is much more in the mortgage monitor.

Kolko: Here are the “Missing” Construction Jobs

by Bill McBride on 1/31/2013 02:13:00 PM

CR Note: This is from Trulia chief economist Jed Kolko:

Construction jobs are a big part of how housing recovery lifts the broader economy. But the construction rebound, so far, appears to be jobless. “Residential construction” jobs, as reported by BLS, were up just 1% in December 2012 from their lowest level since the housing bubble burst – even though new home starts in December 2012 were twice as high as their low point in 2009. Overlaying residential construction employment (monthly, in thousands, left axis) and construction starts (monthly, in thousands, right axis) data suggests a jobless housing recovery, with jobs struggling to turn around even as starts climbed sharply in 2012:

Construction Jobs Click on graph for larger image.

Who is building all these new homes? If starts are now twice their lowest level, why aren’t residential building jobs also twice their lowest level, instead of up just 1%? The answer: this is the wrong way to look at construction jobs. It turns out that construction employment is approximately where it should be for the current level of construction activity. Here are three reasons why:

“Starts” aren’t the right measure of current construction activity. Units “under construction” is more relevant – especially now. The amount of construction activity this month depends not only on this month’s construction starts but also on construction starts in previous months. That’s because single-family construction takes 4-6 months between start and completion, and multi-unit-building construction takes 10-14 months, on average. Therefore, construction starts indicate what will happen to construction activity in the coming months – not necessarily where it is today. And, in this recovery, multi-unit buildings are an unusually high share of overall construction activity, so the typical new unit is under construction for longer, making starts an even-worse-than-usual proxy for current construction activity. Instead of starts, units “under construction” – also reported monthly by the Census – is the right measure of construction activity to compare with jobs. This changes the picture dramatically: while monthly starts in December 2012 were up 100% (that is, have doubled) since the bottom, monthly units under construction were up 32% from the bottom.

The “residential building” jobs category understates growth in residential construction jobs. The BLS “residential building” category covers general contractors and construction management firms but not subcontractors, which are covered under another category the BLS tracks, “residential specialty trade contractors.” Importantly, residential construction jobs have been shifting steadily from general contractors to specialty trade contractors throughout the boom, bust, and recovery, so the narrower “residential building construction” category understates recent growth in construction jobs. “Residential building” jobs in December 2012 were up just 1% from the bottom, while “residential specialty trade contractor” jobs were up 4%. The combined series is up 3% from the bottom. Of course, some construction workers might not be officially counted if they’re off the books, and others might work on both residential and non-residential projects and not fit neatly into one reporting category. Still, looking at both the “residential building” and “residential specialty trade contractors” gives a clearer picture than looking only at “residential building.”

Construction jobs do not move one-for-one with construction activity. Looking at the right measures over time – units under construction and the sum of the two jobs categories – jobs move up and down less than construction activity does. For every 10% increase (or decrease) in the number of units under construction, construction employment increases (or decreases) by a little more than 4%. One reason might be what economists call “labor hoarding” – firms hold onto more workers than they need in temporary downturns if the cost of firing and re-hiring is high relative to keeping them on. Therefore, firms might increase or reduce workers’ hours instead of hiring or firing. Another reason is other construction activities, like remodeling, might move differently with the business cycle than new construction and possibly even soften the ups and downs of demand for construction workers.

Overlaying these two series – “units under construction” (Census) and the sum of “residential building construction” and “residential specialty trade contractors” (BLS), we get:

Construction Jobs Using these measures, jobs track construction activity pretty closely, with a slight lag. Taking this lag into account, a simple time-series model suggests that construction employment is now just 2% lower than it should be for the current level of construction activity.

The picture might change tomorrow in the January jobs report. As part of tomorrow’s report, the BLS will release its annual benchmark revision of previously reported employment figures. The preliminary revision announced in September suggested that employment for construction overall (including non-residential) would be revised up 1.6% for the benchmark month (March 2012). If tomorrow’s official revision to residential employment is in that range, the jobless construction recovery might not be missing any jobs at all.

What does this mean for construction employment in 2013? Suppose starts rise another 20% in 2013 relative to 2012 – a bit slower than the 28% increase in 2012 relative to 2011. Recent trends suggest that the number of units under construction should be a hair over 20% higher in December 2013 than in December 2012. Even though units under construction didn’t grow as fast as starts in 2012, much of the effect of the increase in starts in 2012 will be on construction activity in 2013, not in 2012. As a result, construction jobs – residential building plus residential specialty trade contractors – could grow 8% in 2013. The sharp increase in construction starts in 2012 should mean more construction jobs in 2013.

Employment Situation Preview

by Bill McBride on 1/31/2013 11:28:00 AM

On Friday, at 8:30 AM ET, the BLS will release the employment report for January. The consensus is for an increase of 185,000 non-farm payroll jobs in January, up from the 155,000 jobs added in December. The consensus is for the unemployment rate to decline to 7.7% from 7.8% last month.

Here is a summary of recent data:

• The ADP employment report showed an increase of 198,000 private sector payroll jobs in January. This was above expectations. The ADP report hasn't been very useful in predicting the BLS report for any one month, although the methodology changed recently. In general this suggests employment growth in line or above expectations.

• The ISM manufacturing and non-manufacturing (service) indexes for January will not be released until after the employment report.  However the Chicago PMI employment index increased sharply in January to 58.0 from 46.8 in December (above 50 is expansion) and this might suggest some upside for employment.

Initial weekly unemployment claims averaged about 351,000 in January. This is the lowest level for unemployment claims since early 2008.

For the BLS reference week (includes the 12th of the month), initial claims were at 335,000; the lowest for a reference week since January 2008.  This is positive for employment.

• The preliminary January Reuters / University of Michigan consumer sentiment index declined to 71.3, down from the December reading of 72.9. This is frequently coincident with changes in the labor market, stock market, gasoline prices and other factors such as budget uncertainty. This might suggest some decrease in employment, but I think the recent declines were related to budget threats.

• The January small business index from Intuit showed 20,000 payroll jobs added, the same number as in December. This is still very low.

• And on the unemployment rate from Gallup: Gallup finds seasonally unadjusted unemployment unchanged at 7.8%

Gallup's unadjusted unemployment rate for the U.S. workforce was 7.8% for the month of January, statistically unchanged from 7.7% at the end of December, but down from 8.6% a year ago. Gallup's seasonally adjusted unemployment rate for January was 7.3%, a 0.6-percentage-point decline from 7.9% in December.
Note: Gallup only recently has been providing a seasonally adjusted estimate for the unemployment rate, so use with caution. So far the Gallup numbers haven't been very useful in predicting the BLS unemployment rate, but this does suggest a decrease in the unemployment rate in January.

• Conclusion: Most of the employment related data was stronger in January than in December (or most of last year).  There is always some randomness to the employment report - and there are large seasonal factors for January - but I'd take the over on the headline payroll jobs number.

Personal Income increased 2.6% in December, Spending increased 0.2%

by Bill McBride on 1/31/2013 09:08:00 AM

Note: Personal income jumped in December as many high income earners accelerated income into 2012 to avoid higher 2013 taxes. This pushed up personal income sharply, and also increased the savings rate. This will be reversed in the January report, and there will be a large decline in personal income on a month-to-month basis.

The BEA released the Personal Income and Outlays report for December:

Personal income increased $352.4 billion, or 2.6 percent ... in December, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) increased $22.6 billion, or 0.2 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.2 percent in December, compared with an increase of 0.6 percent in November. ... The price index for PCE decreased less than 0.1 percent in December, compared with a decrease of 0.2 percent in November. The PCE price index, excluding food and energy, increased less than 0.1 percent in December, the same increase as in November.
...
Personal saving -- DPI less personal outlays -- was $436.7 billion in November, compared with $404.6 billion in October. The personal saving rate -- personal saving as a percentage of disposable personal income -- was $805.2 billion in December, compared with $495.0 billion in November. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 6.5 percent in December, compared with 4.1 percent in November.
The following graph shows real Personal Consumption Expenditures (PCE) through December (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Personal Consumption Expenditures Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE.   PCE for both October and November was revised up slightly.

PCE will probably be a little weak in Q1 because of the payroll tax increase, however, I still expect PCE to increase between 1.5% to 2.0% annualized in Q1.

Weekly Initial Unemployment Claims increase to 368,000

by Bill McBride on 1/31/2013 08:30:00 AM

The DOL reports:

In the week ending January 26, the advance figure for seasonally adjusted initial claims was 368,000, an increase of 38,000 from the previous week's unrevised figure of 330,000. The 4-week moving average was 352,000, an increase of 250 from the previous week's unrevised average of 351,750.
The previous week was unrevised.

The following graph shows the 4-week moving average of weekly claims since January 2000.


Click on graph for larger image.


The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims increased slightly to 352,000.

Weekly claims were above the 350,000 consensus forecast, however the 4-week average is near the levels of early 2008.

Wednesday, January 30, 2013

Thursday: Initial Unemployment Claims, Personal Income and Outlays, Chicago PMI

by Bill McBride on 1/30/2013 08:45:00 PM

In general the media covered the GDP report correctly. Even though the headline number was slightly negative, the underlying details were in line with expectations (except the sharp drop in Federal government spending for defense). As an example, from the NY Times: Economy Contracted Unexpectedly in Fourth Quarter

The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. ...

Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending.
...
The 22.2 percent drop in military spending – the sharpest quarterly drop in more than four decades – along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, [Michael Feroli, chief United States economist at JPMorgan] said.
That is similar to my post this morning: Comments on Q4 GDP and Investment

Thursday economic releases:
• At 8:30 AM ET, the initial weekly unemployment claims report will be released. The consensus is for claims to increase to 350 thousand from 330 thousand last week.

• Also at 8:30 AM, Personal Income and Outlays for December. The consensus is for a 0.7% increase in personal income in December, and for 0.3% increase in personal spending. And for the Core PCE price index to increase 0.1%. Personal income was boosted by some high income earners accelerating income to avoid higher taxes in 2013.

• At 9:45 AM, the Chicago Purchasing Managers Index for January will be released. The consensus is for a decrease to 50.5, down from 51.6 in December.

Lawler: Some Home Builder Results

by Bill McBride on 1/30/2013 04:32:00 PM

From economist Tom Lawler:

D. R. Horton, the nation’s largest home builder, reported that net home orders in the quarter ended December 31, 2012 totaled 5,259, up 38.6% from the comparable quarter of 2012. The company’s sales cancellation rate, expressed as a % of gross orders, was 22%, down from 26% a year ago. Home deliveries last quarter totaled 5,182, up 25.8% from the comparable quarter of 2012, at an average sales price of $236,067, up 9.9% from a year ago. The company’s order backlog at the end of 2012 totaled 7,317, up 61.5% from a year ago, with an average order price of $240,358, up 11.7% from a year earlier.

Here is an excerpt from the company’s press release.

Donald R. Horton, Chairman of the Board, said, “This quarter was our most profitable first quarter since 2007, with $107.9 million of pre-tax income, a 270% increase from the year-ago quarter. We experienced substantial increases in the number of homes sold, closed and in backlog compared to the year-ago quarter. At the same time, our average sales price has increased due to pricing power, geographic mix and larger average home size. As a result, we achieved dollar value increases in homes sold of 60%, homes closed of 38% and backlog of 80%.

“We experienced broad improvement in demand in most of our markets this quarter, and we significantly increased our investments in homes under construction, finished lots, land and land development to capture this increasing demand. D.R. Horton is the best positioned it has been in its 35 year history. We are looking forward to the spring selling season with optimism.”
The Ryland Group, the 8th largest US home builder in 2011, reported that net home orders in the quarter ended December 31, 2012 (including discontinued operations) totaled 1,502, up 64.2% from the comparable quarter of 2011. The company’s sales cancellation rate, expressed as a % of gross orders, was 17.9%, down from 21.4% a year ago. Home closings last quarter totaled 1,578, up 51.7% from the comparable quarter of 2011, at an average sales price of $270,000, up 6.2% from a year ago. Ryland said that “sales incentives and price concessions” totaled 8.7% last quarter, compared to 10.7% during the same period in 2011. The company’s order backlog at the end of December totaled 2,398, up 58.4% from a year earlier, at an average order price of $278,000, up 8.2% from a year ago.

Here is a summary of builder results reported so far.

Net OrdersSettlementsAverage Closing Price
Qtr. Ended:Dec 2012Dec 2011% ChgDec 2012Dec 2011% ChgDec 2012Dec 2011% Chg
D.R. Horton5,2573,79438.6%5,1824,11825.8%$236,067 $214,740 9.9%
NVR2,6252,15821.6%2,7882,39116.6%$331,900 $304,600 9.0%
The Ryland Group1,50291564.2%1,5781,04051.7%$270,000 $254,000 6.3%
Total9,3846,86736.7%9,5487,54926.5%$269,658 $248,610 8.5%

FOMC Statement: "Economic activity paused because of transitory factors"

by Bill McBride on 1/30/2013 02:15:00 PM

Pretty much the same as last month. The FOMC argues "economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors".

FOMC Statement:

Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors. Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement. Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Comments on Q4 GDP and Investment

by Bill McBride on 1/30/2013 10:01:00 AM

The Q4 GDP report was negative, with a 0.1% annualized decline in real GDP, and lower than the expected 1.0% annualized increase. Final demand increased in Q4 as personal consumption expenditures (PCE) increased at a 2.2% annual rate (up from 1.6% in Q3), and residential investment increased at a 15.3% annual rate (up from 13.5% in Q3). 

Investment in equipment and software rebounded in Q4 (increased at 12.4% annualized rate), and investment in non-residential structures was slightly negative.  

The slight decline in GDP was related to changes in private inventories (subtracted 1.27 percentage points), less Federal Government spending (subtracted 1.25 percentage points), and a negative contribution from trade (subtracted 0.25 percentage points).

Overall this was a weak report, but with some underlying positives (the increase in PCE and private fixed investment).  I expect the payroll tax increase to slow PCE growth in the first half of 2013 - and for additional government austerity - but I think the economy will continue to grow this year.

The following graph shows the contribution to GDP from residential investment, equipment and software, and nonresidential structures (3 quarter centered average). This is important to follow because residential investment tends to lead the economy, equipment and software is generally coincident, and nonresidential structure investment trails the economy.

For the following graph, red is residential, green is equipment and software, and blue is investment in non-residential structures. So the usual pattern - both into and out of recessions is - red, green, blue.

The dashed gray line is the contribution from the change in private inventories.

Investment ContributionsClick on graph for larger image.

Residential Investment (RI) made a positive contribution to GDP in Q4 for the seventh consecutive quarter. Usually residential investment leads the economy, but that didn't happen this time because of the huge overhang of existing inventory, but now RI is contributing. The good news: Residential investment has clearly bottomed.

The contribution from RI will probably continue to be sluggish compared to previous recoveries, but the ongoing positive contribution to GDP is a significant story.

Equipment and software investment increased solidly in Q4, after decreasing in Q3. This followed twelve consecutive quarters with a positive contribution.

The contribution from nonresidential investment in structures was slightly negative in Q4. Nonresidential investment in structures typically lags the recovery, however investment in energy and power has masked the ongoing weakness in office, mall and hotel investment (the underlying details will be released next week).

The second graph shows the contribution to percent change in GDP for residential investment and state and local governments since 2005.

State and Local Government Residential Investment GDPThe blue bars are for residential investment (RI), and RI was a significant drag on GDP for several years. Now RI has added to GDP growth for the last 7 quarters (through Q4 2012).

However the drag from state and local governments is ongoing, although the drag in Q4 was small.   Although not as large a negative as the worst of the housing bust (and much smaller spillover effects), this decline in state and local government spending has been relentless and unprecedented. The good news is the drag appears to be ending.

Residential InvestmentResidential Investment as a percent of GDP is up from the record lows during the housing bust. Usually RI bounces back quickly following a recession, but this time there is a wide bottom because of the excess supply of existing vacant housing units.

In 2011, the increase in RI was mostly from multifamily and home improvement investment. Now the increase is from most categories including single family. I'll break down Residential Investment (RI) into components after the GDP details are released this coming week. Note: Residential investment (RI) includes new single family structures, multifamily structures, home improvement, broker's commissions, and a few minor categories.

non-Residential InvestmentThe last graph shows non-residential investment in structures and equipment and software.

I'll add details for investment in offices, malls and hotels next week.

The key story is that residential investment is continuing to increase, and I expect this to continue. Since RI is the best leading indicator for the economy, this suggests no recession this year or in 2014 (with the usual caveats about Europe and policy errors in the US).

Real GDP decreased 0.1% Annualized in Q4

by Bill McBride on 1/30/2013 08:39:00 AM

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent

The increase in real GDP in the second quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and residential fixed investment that were partly offset by a negative contribution from state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The decrease in real GDP in the fourth quarter primarily reflected negative contributions from private inventory investment, federal government spending, and exports that were partly offset by positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.
Personal consumption expenditures (PCE) increased at a 2.2% annualized rate, and residential investment increased 15.3%, equipment and software increased 12.4%. That is a solid increase in fixed investment.

"Change in private inventories" subtracted 1.27 percentage points from GDP in Q4, and the Federal government subtracted 1.25 percentage points (mostly a sharp decrease in defense spending).

This was below expectations, but the internals were decent with PCE and private investment increasing (domestic demand). I'll have more on GDP later ...

ADP: Private Employment increased 192,000 in January

by Bill McBride on 1/30/2013 08:20:00 AM

From ADP:

Private sector employment increased by 192,000 jobs from December to January, according to the January ADP National Employment Report®, which is produced by ADP® ... in collaboration with Moody’s Analytics. The report, which is derived from ADP’s actual payroll data, measures the change in total nonfarm private employment each month on a seasonally-adjusted basis. The December 2012 report, which reported job gains of 215,000, was revised downward by 30,000 to 185,000 jobs.

Mark Zandi, chief economist of Moody’s Analytics, said, “The job market is slowly, but steadily, improving. Monthly job gains appear to have accelerated from near 150,000 to closer to 175,000. Construction is finally kicking into gear and more than offsetting the weakness in manufacturing. The recent gains may be overstating any improvement, particularly in the context of recent revivals in growth at the start of the past three years, but the gains are encouraging nonetheless.”
This was above the consensus forecast for 172,000 private sector jobs added in the ADP report. Note:  The BLS reports on Friday, and the consensus is for an increase of 155,000 payroll jobs in January, on a seasonally adjusted (SA) basis.

Note: ADP hasn't been very useful in predicting the BLS report.

Tuesday, January 29, 2013

Wednesday: Q4 GDP, FOMC Announcement, ADP Employment

by Bill McBride on 1/29/2013 07:16:00 PM

Doug Short provides a preview on GDP: WSJ Economists' GDP Forecasts: 1.6% for Q4 2012 and 1.7 in Q1 2013

A big economic announcement this week will be tomorrow's Advance Estimate for Q4 GDP from the Bureau of Economic Analysis. The final number for Q3 GDP was 3.1%. The general consensus is that Q4 will show a significant decline in this broad measure of the economy. Investing.com weighs in at 1.8%. According to Briefing.com, the consensus for Q4 is 1.0%. However, Briefing.com's own estimate, I should point out, is considerably lower at 0.1%.
From Merrill Lynch:
The first release of Q4 GDP is likely to show that growth weakened at the end of 2012. We forecast GDP growth of 1.0%, down from the 3.1% pace in Q3. However, much of the slowdown owes to a contraction in inventories and widening in the trade deficit; domestic final sales should hold close to 2.0%. As such, we advise smoothing through the two quarters to gauge the underlying trend of the economy.

We expect a decent gain in consumer spending of 2.3% and a solid increase in residential investment of 17%. ... The healthy gain in residential investment reflects the turn in homebuilding and greater renovation spending. We also expect equipment and software investment to increase after declining in Q3. On the downside, the trade deficit is likely to widen due to a sharp drop in exports. The biggest drag, however, will come from a sharp contraction in inventories.
As always, the details will matter.

Wednesday economic releases:
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

• At 8:15 AM, The ADP Employment Report for January will be released. This report is for private payrolls only (no government). The consensus is for 172,000 payroll jobs added in January. Even with the new methodology, the report still hasn't been that useful in predicting the BLS report.

• At 8:30 AM, the Q4 GDP report will be released. This is the advance (first) release from the BEA. The consensus is that real GDP increased 1.0% annualized in Q4.

• Around 11:15 AM, the FOMC Meeting Announcement will be released. No significant changes are expected,

Earlier on House Prices:
Case-Shiller: House Prices increased 5.5% year-over-year in November
Comment on House Prices, Real House Prices, and Price-to-Rent Ratio
All Current House Price Graphs

Lawler on Housing Vacancy Survey

by Bill McBride on 1/29/2013 03:50:00 PM

CR Note: This is wonkish, but important for those using the HVS. An excerpt from economist Tom Lawler: Housing Vacancy Survey: Vacancy Rates “Mixed” on Quarter, Down from Year Ago; Reported Homeownership Rate Lowest Since 1996 (and “True” Homeownership Even Lower!)

The Census Bureau released the “Residential Vacancies and Homeownership” Report for Q4/2012, which is based on the “Housing Vacancy Survey” supplement to the Current Population Survey. The HVS results have not been consistent with the results from the last two decennial Censuses, with the HVS significantly overstating housing vacancy rates and homeownership rates – with the HVS/Census “gap” growing from 2000 to 2010.

According to the Q4 HVS results, the US rental vacancy rate last quarter was 8.7%, up from 8.6% in the previous quarter but down from 9.4% in Q4/11; the HVS homeowner vacancy rate last quarter ws 1.9%, unchanged from the previous quarter but down from 2.3% in Q4/11; and the US homeownership rate last quarter was 65.4%, down from 65.5% in the previous quarter and 66.0% in Q4/11. Last quarter’s HVS-based homeownership rate estimate was the lowest for a fourth quarter since 1996, and the “actual” homeownership rate last quarter was almost certainly lower.

As highlighted in the “sources and accuracy” page of the CPS/HVS, the HVS results for many key measures vary dramatically from decennial Census results.

199020002010
Rental Vacancy Rate
HVS first half7.2%7.9%10.6%
Census (April 1)8.5%6.8%9.2%
HVS - Census-1.3%1.1%1.4%
Homeowner Vacancy Rate
HVS first half1.7%1.5%2.6%
Census (April 1)2.1%1.7%2.4%
HVS - Census-0.4%-0.2%0.2%
Homeownership Rate
HVS first half63.9%67.2%67.0%
Census (April 1)64.2%66.2%65.1%
HVS - Census-0.3%1.0%1.9%

While it is generally agreed that the HVS does not provide an accurate picture of the US housing market, and Census analysts are “concerned” about the growing “gap” between the HVS and the decennial Census, to the best of my knowledge no work has been done on identifying whether the HVS inaccuracies are related to sampling errors, non-sampling errors, or both.

The HVS report includes “estimates” of the US housing stock by occupancy and vacancy status, but its estimates for the total housing stock are based on housing stock estimates from the Population Division of Census, which are “benchmarked” to decennial Census results. Stated another way, the HVS assumes that the decennial Census estimates of the housing stock are accurate, but also implicitly assumes that the decennial Census estimates of the number of occupied units – total and by tenure – and the number of vacant units – total and by vacancy status – are “bogus.”

Here is the table on the US housing stock from today’s HVS report.

Housing Vacancy Survey Click on table for larger image.

It is worth noting that the 90% confidence interval shown in the HVS report are measures of “sampling variability,” and assume that the sample used is an unbiased sample of the entire housing “universe.” Statistical comparisons between the HVS and the ACS reject the hypothesis that both surveys use unbiased samples from the same housing universe, while comparisons of the HVS and the decennial Census reject the hypothesis that the HVS estimates are unbiased estimates of housing vacancy and homeownership rates.

A recent study comparing the housing “universe” used for the 2010 ACS with that of the decennial Census revealed some startling (and troubling) differences in terms of both housing units omitted or erroneously excluded and (especially) “housing” unit erroneously included. The HVS sample almost certainly has even bigger “issues.”

The biggest apparent “bias” in the HVS is that it materially underestimates the number/share of the housing stock that is occupied by renters (and overstates the number/share of the housing stock that is vacant). I am not sure why.
...
Lawler concludes: The “true” US homeownership rate last quarter was probably the lowest since the mid-80’s.

HVS: Q4 Homeownership and Vacancy Rates

by Bill McBride on 1/29/2013 01:34:00 PM

The Census Bureau released the Housing Vacancies and Homeownership report for Q4 2012 this morning.

This report is frequently mentioned by analysts and the media to track the homeownership rate, and the homeowner and rental vacancy rates.  However, there are serious questions about the accuracy of this survey.  Note: I expect housing economist Tom Lawler to send me some comments on this today.

This survey might show the trend, but I wouldn't rely on the absolute numbers.  The Census Bureau is investigating the differences between the HVS, ACS and decennial Census, and analysts probably shouldn't use the HVS to estimate the excess vacant supply, or rely on the homeownership rate, except as a guide to the trend.

Homeownership Rate Click on graph for larger image.

The Red dots are the decennial Census homeownership rates for April 1st 1990, 2000 and 2010. The HVS homeownership rate decreased slightly to 65.4%, and down from 65.5% in Q3.

I'd put more weight on the decennial Census numbers and that suggests the actual homeownership rate is probably in the 64% to 65% range.

Homeowner Vacancy RateThe HVS homeowner vacancy rate was unchanged at 1.9% in Q4. This is the lowest level since 2005 for this report.

The homeowner vacancy rate has peaked and is now declining, although it isn't really clear what this means. Are these homes becoming rentals? Anyway - once again - this probably shows that the trend is down, but I wouldn't rely on the absolute numbers.

Rental Vacancy RateThe rental vacancy rate was increased in Q4 to 8.7%, from 8.6% in Q3.

I think the Reis quarterly survey (large apartment owners only in selected cities) is a much better measure of the overall trend in the rental vacancy rate - and Reis reported that the rental vacancy rate has fallen to the lowest level since 2001.

The quarterly HVS is the most timely survey on households, but there are many questions about the accuracy of this survey. Unfortunately many analysts still use this survey to estimate the excess vacant supply. However this does suggest that the housing vacancy rates have declined sharply.

Earlier on House Prices:
Case-Shiller: House Prices increased 5.5% year-over-year in November
Comment on House Prices, Real House Prices, and Price-to-Rent Ratio
All Current House Price Graphs

Comment on House Prices, Real House Prices, and Price-to-Rent Ratio

by Bill McBride on 1/29/2013 11:27:00 AM

There is a clear seasonal pattern for house prices, and earlier this year I predicted that the Case-Shiller indexes would turn negative month-to-month in October on a Not Seasonally Adjusted (NSA) basis.  That is the normal seasonal pattern.

Also I expected smaller month-to-month declines this winter than for the same months last year. Sure enough, Case-Shiller reported that the Composite 20 index NSA declined slightly in October, and also declined slightly again in November (a 0.1% decline).  In November 2011, the index declined 1.3% on a month-to-month basis, so this is a significant change.

Over the winter the key will be to watch the year-over-year change in house prices and to compare to the NSA lows in early 2012. I think the house price indexes have already bottomed, and will be up over 6% or so year-over-year when prices reach the usual seasonal bottom in early 2013.

House Prices month-to-month change NSA Click on graph for larger image.

This graph shows the month-to-month change in the CoreLogic and NSA Case-Shiller Composite 20 index over the last several years (both through November). The CoreLogic index turned negative month-to-month in the September report, and then turned slightly positive in November (CoreLogic is a 3 month weighted average, with the most recent month weighted the most). Case-Shiller NSA turned negative month-to-month in the October report (also a three month average, but not weighted), but was only slightly negative in November.

For November, Case-Shiller reported the sixth consecutive year-over-year (YoY) gain in their house price indexes since 2010 - and the increase back in 2010 was related to the housing tax credit. Excluding the tax credit, the previous YoY increase was back in 2006. The YoY increase in November suggests that house prices probably bottomed earlier in 2012 (the YoY change lags the turning point for prices).

The following table shows the year-over-year increase for each month this year.

Case-Shiller Composite 20 Index
MonthYoY Change
Jan-12-3.9%
Feb-12-3.5%
Mar-12-2.6%
Apr-12-1.7%
May-12-0.5%
Jun-120.6%
Jul-121.1%
Aug-121.9%
Sep-122.9%
Oct-124.2%
Nov-125.5% 
Dec-12 
Jan-13 

Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio.

As an example, if a house price was $200,000 in January 2000, the price would be close to $275,000 today adjusted for inflation.

Real prices, and the price-to-rent ratio, are back to late 1999 to 2000 levels depending on the index.

Nominal House Prices

Nominal House PricesThe first graph shows the quarterly Case-Shiller National Index SA (through Q3 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through November) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q1 2003 levels (and also back up to Q3 2010), and the Case-Shiller Composite 20 Index (SA) is back to September 2003 levels, and the CoreLogic index (NSA) is back to January 2004.

Real House Prices

Real House PricesThe second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to mid-1999 levels, the Composite 20 index is back to September 2000, and the CoreLogic index back to February 2001.

In real terms, most of the appreciation in the last decade is gone.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Price-to-Rent RatioHere is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q3 1999 levels, the Composite 20 index is back to September 2000 levels, and the CoreLogic index is back to February 2001.

In real terms - and as a price-to-rent ratio - prices are mostly back to early 2000 levels.


All Current House Price Graphs

Case-Shiller: House Prices increased 5.5% year-over-year in November

by Bill McBride on 1/29/2013 09:00:00 AM

S&P/Case-Shiller released the monthly Home Price Indices for November (a 3 month average of September, October and November).

This release includes prices for 20 individual cities, and two composite indices (for 10 cities and 20 cities).

Note: Case-Shiller reports Not Seasonally Adjusted (NSA), I use the SA data for the graphs.

From S&P: Home Prices Extend Gains According to the S&P/Case-Shiller Home Price Indices

Data through November 2012, released today by S&P Dow Jones Indices for its S&P/Case-Shiller1 Home Price Indices ... showed home prices rose 4.5% for the 10-City Composite and 5.5% for the 20-City Composite in the 12 months ending in November 2012.

“The November monthly figures were stronger than October, with 10 cities seeing rising prices versus seven the month before.” says David M. Blitzer, Chairman of the Index Committee at S&P Dow Jones Indices. Phoenix and San Francisco were both up 1.4% in November followed by Minneapolis up 1.0%. On the down side, Chicago was again amongst the weakest with a drop of 1.3% for November.

“Winter is usually a weak period for housing which explains why we now see about half the cities with falling month-to-month prices compared to 20 out of 20 seeing rising prices last summer. The better annual price changes also point to seasonal weakness rather than a reversal in the housing market. Further evidence that the weakness is seasonal is seen in the seasonally adjusted figures: only New York saw prices fall on a seasonally adjusted basis while Cleveland was flat.
Case-Shiller House Prices Indices Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 30.7% from the peak, and up 0.5% in November (SA). The Composite 10 is up 5.3% from the post bubble low set in March (SA).

The Composite 20 index is off 29.8% from the peak, and up 0.6% (SA) in November. The Composite 20 is up 6.0% from the post-bubble low set in March (SA).

Case-Shiller House Prices Indices The second graph shows the Year over year change in both indices.

The Composite 10 SA is up 4.5% compared to November 2011.

The Composite 20 SA is up 5.5% compared to November 2011. This was the sixth consecutive month with a year-over-year gain since 2010 (when the tax credit boosted prices temporarily).  This was the largest year-over-year gain for the Composite 20 index since 2006.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Case-Shiller Price Declines Prices increased (SA) in 18 of the 20 Case-Shiller cities in November seasonally adjusted (also 10 of 20 cities increased NSA). Prices in Las Vegas are off 57.6% from the peak, and prices in Dallas only off 3.8% from the peak. Note that the red column (cumulative decline through November 2012) is above previous declines for all cities.

This was slightly below the consensus forecast for a 5.8% YoY increase. I'll have more on prices later.

Monday, January 28, 2013

Tuesday: Case-Shiller House Prices

by Bill McBride on 1/28/2013 08:58:00 PM

From the WSJ: Bank 'Stress Tests' to Be Released Over 2 Days

The Federal Reserve said Monday that it will release the results of the latest "stress tests" for the nation's 19 largest banks over two separate days in March.
...
The Fed said it will release on March 7 scores assessing how banks would hold up under deteriorating economic and financial-market conditions. On March 14, the Fed will reveal whether the 19 banks will be permitted to repurchase stock or pay dividends.
...
Unlike previous years, banks whose dividend or share-buyback plans would cause them to fail the central bank's test will essentially be allowed a mulligan, giving them the chance to pare back or alter their plan to meet Fed thresholds before the official results are released.
Here is the Federal Reserve press release.

Tuesday economic releases:
• At 9:00 AM ET, S&P/Case-Shiller House Price Index for November. Although this is the November report, it is really a 3 month average of September, October and November. The consensus is for a 5.8% year-over-year increase in the Composite 20 index (NSA) for November. The Zillow forecast is for the Composite 20 to increase 5.3% year-over-year, and for prices to increase 0.4% month-to-month seasonally adjusted.

• At 10:00 AM, Conference Board's consumer confidence index for January. The consensus is for the index to be unchanged at 65.1.

• Also at 10:00 AM, the Q4 Housing Vacancies and Homeownership report from the Census Bureau will be released. This report is frequently mentioned by analysts and the media to report on the homeownership rate, and the homeowner and rental vacancy rates. However, this report doesn't match other measures (like the decennial Census and the ACS) and this survey probably shouldn't be used to estimate the excess vacant housing supply.

Existing Home Inventory up 3.7% in late January

by Bill McBride on 1/28/2013 03:30:00 PM

One of key questions for 2013 is Will Housing inventory bottom this year?. Since this is a very important question, I'll be tracking inventory weekly for the next few months.

If inventory does bottom, we probably will not know for sure until late in the year. In normal times, there is a clear seasonal pattern for inventory, with the low point for inventory in late December or early January, and then peaking in mid-to-late summer.

The NAR data is monthly and released with a lag.  However Ben at Housing Tracker (Department of Numbers) kindly sent me some weekly inventory data for the last several years. This is displayed on the graph below as a percentage change from the first week of the year.

In 2010 (blue), inventory followed the normal seasonal pattern, however in 2011 and 2012, there was only a small increase in inventory early in the year, followed by a sharp decline for the rest of the year.

So far - through January - it appears inventory is increasing at a more normal rate.

Exsiting Home Sales Weekly dataClick on graph for larger image.

Note: the data is a little weird for early 2011 (spikes down briefly).

The key will be to see how much inventory increases over the next few months. In 2010, inventory was up 8% by early March, and up 15% by the end of March.

For 2011 and 2012, inventory only increased about 5% at the peak.

So far in 2013, inventory is up 3.7%, and the next few months will be very interesting for inventory!

Dallas Fed: Regional Manufacturing Activity "Strengthens" in January

by Bill McBride on 1/28/2013 11:38:00 AM

From the Dallas Fed: Texas Manufacturing Activity Strengthens in January

Texas factory activity rose sharply in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 3.5 to 12.9, which is consistent with faster growth.

Other measures of current manufacturing activity also indicated stronger growth in January. The new orders index jumped 13 points to 12.2, its highest reading since March 2011. The capacity utilization index shot up from 2.1 to 14.0, implying utilization rates increased faster than last month. The shipments index rose 9 points to 21.9, indicating shipments quickened in January.

Perceptions of broader business conditions were more positive in January. The general business activity index increased from 2.5 to 5.5, its best reading since March. The company outlook index also rose sharply to 12.6, largely due to a drop in the share of firms reporting a worsened outlook from 10 percent in December to 6 percent in January.

Labor market indicators reflected a sharp increase in hiring but flat workweeks.
This was the strongest regional manufacturing report for January and above expectations of a reading of 4.0 for the general business activity index.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Fed Manufacturing Surveys and ISM PMI Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (dashed green, through January), and five Fed surveys are averaged (blue, through January) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through December (right axis).

The average of the five regional surveys turned negative again.

The ISM index for January will be released Friday, Feb 1st, and these surveys suggest another weak reading - and probably indicating contraction (below 50). Note: The Markit Flash index was surprisingly strong in January.

Pending Home Sales index declines in December

by Bill McBride on 1/28/2013 10:00:00 AM

From the NAR: Pending Home Sales Down in December but Remain on Uptrend

The Pending Home Sales Index,* a forward-looking indicator based on contract signings, fell 4.3 percent to 101.7 in December from 106.3 in November but is 6.9 percent higher than December 2011 when it was 95.1. The data reflect contracts but not closings.
...
Lawrence Yun , NAR chief economist, said there is an uneven uptrend. "The supply limitation appears to be the main factor holding back contract signings in the past month. Still, contract activity has risen for 20 straight months on a year-over-year basis," he said. "Buyer interest remains solid, as evidenced by a separate Realtor® survey which shows that buyer foot traffic is easily outpacing seller traffic."

Yun said shortages of available inventory are limiting sales in some areas. "Supplies of homes costing less than $100,000 are tight in much of the country, especially in the West, so first-time buyers have fewer options," he said ...

The PHSI in the Northeast fell 5.4 percent to 78.8 in December but is 8.4 percent higher than December 2011. In the Midwest the index rose 0.9 percent to 104.8 in December and is 14.4 percent above a year ago. Pending home sales in the South declined 4.5 percent to an index of 111.5 in December but are 10.1 percent higher December 2011. In the West the index fell 8.2 percent in December to 101.0 and is 5.3 percent below a year ago.
Contract signings usually lead sales by about 45 to 60 days, so this would usually be for closed sales in January and February.

As I've noted several times, with limited inventory at the low end and fewer foreclosures, we might see flat or even declining existing home sales. The key for sales is that the number of conventional sales is increasing while foreclosure and short sales decline.

Housing Spillover Effects

by Bill McBride on 1/28/2013 09:04:00 AM

People frequently ask how a sector that currently accounts for 2.5% of the US economy can be so important. First, residential investment has large swings during the business cycle, and will probably increase sharply over the next few years. Second, there are spillover effects from housing - meaning housing has a much larger impact on overall economic activity than just "residential investment".

We are starting to see some signs of spillover from Kate Linebaugh and James Hagerty at the WSJ: From Power Tools to Carpets, Housing Recovery Signs Mount

Companies that sell power tools, air conditioners, carpet fibers, furniture and cement mixers are reporting stronger sales for the fourth quarter, providing further evidence that a turnaround in the housing market is taking hold.

... executives at companies exposed to housing are growing more optimistic. Improvement in the sector could help broad tracts of the economy by creating jobs, improving consumer confidence and boosting property-tax receipts for municipalities. Construction typically is a big job creator during expansions, though the industry has been slow to staff up during the current recovery.

"The housing recovery will help lift businesses that have long been dormant," said Mark Vitner, senior economist at Wells Fargo. "People will be fixing up homes to put them up for sale—buying new air conditioners, painting, fixing roofs. As the new-home market picks up, that really feeds into [gross domestic product]."
Weekend:
Summary for Week Ending Jan 25th
Schedule for Week of Jan 27th
Thresholds for QE
Me, Me, Me

Sunday, January 27, 2013

Monday: Durable Goods, Pending Home Sales

by Bill McBride on 1/27/2013 09:16:00 PM

This is related to my earlier post on Thresholds for QE, from Binyamin Appelbaum at the NY Times: At Fed, Nascent Debate on When to Slow Asset Buying

The looming question is how much longer the asset purchases will continue.

... the discussion already has begun to swing toward informal thresholds.

Mr. Rosengren said last year that the Fed should certainly continue the purchases until the unemployment rate declines at least below 7.25 percent.

James Bullard, president of the Federal Reserve Bank of St. Louis ... [told] CNBC that he expected the unemployment rate to drop to near 7 percent by the end of the year and that it would then be appropriate for the Fed to consider suspending its program of asset purchases.
This discussion is just starting, and I don't expect any significant announcements after the FOMC meeting this week.

The Asian markets are mostly green tonight; the Shanghai Composite index is up 1%.

From CNBC: Pre-Market Data and Bloomberg futures: the S&P futures and DOW are flat (fair value).

Oil prices have moved up a little recently with WTI futures at $95.97 per barrel and Brent at $113.27 per barrel. Gasoline prices are up about 5 cents over the last 10 days.

Monday:
• At 8:30 AM ET, Durable Goods Orders for December from the Census Bureau. The consensus is for a 1.6% increase in durable goods orders.

• At 10:00 AM, the NAR will release their Pending Home Sales Index for December. The consensus is for a 0.3% decrease in the index.

• At 10:30 AM, the Dallas Fed Manufacturing Survey for January will be released. This is the last of the regional surveys for January. The consensus is a decrease to 4.0 from 6.8 in December (above zero is expansion).

Weekend:
Summary for Week Ending Jan 25th
Schedule for Week of Jan 27th
Thresholds for QE
Me, Me, Me

Does this mark the top for bond prices?

by Bill McBride on 1/27/2013 05:35:00 PM

Fun on a Sunday with a hat tip to reader Jeff for suggesting this post.

Last year I posted a photo of the early construction phase of the PIMCO Taj Mahal. Now they are working on the interior of the building (building on the left).

The question is: Does completion of the PIMCO building mark the top for bond prices?

PIMCO's Taj Mahal
Earlier:
Summary for Week Ending Jan 25th
Schedule for Week of Jan 27th
Thresholds for QE
Me, Me, Me

Thresholds for QE

by Bill McBride on 1/27/2013 02:42:00 PM

In the schedule for this coming week, I mentioned there is a two day Federal Open Market Committee (FOMC) meeting ending on Wednesday, January 30th with the FOMC announcement expected at 2:15 PM ET on Wednesday. No significant changes are expected at this meeting.

At the last meeting, the FOMC set "thresholds" for raising the Fed Funds rate. From the December FOMC statement:

"[The FOMC] anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. The Committee views these thresholds as consistent with its earlier date-based guidance."
emphasis added
An interesting question is if the FOMC will set thresholds for reducing or ending the current $85 billion per month in asset purchases (aka Quantitative Easing or QE). Goldman Sachs chief economist Jan Hatzius discussed this possibility last week:
"The rationale for QE thresholds is similar to that for funds rate thresholds, namely that they would help the financial markets understand the Fed's reaction function with respect to changes in the economic outlook. If the committee adopted such an approach, the most likely thresholds would be 7.25% for the unemployment rate, 2.5% for the 1-2 year PCE inflation outlook, and "well anchored" inflation expectations. We would also expect an additional "out," namely that QE must not impair market functioning or create financial imbalances.

Any move to QE thresholds would probably not occur until the spring or summer of 2013. But the future of QE, the criteria for slowing or ending it, and perhaps even the question of whether QE thresholds are desirable in principle are likely to be on the FOMC's agenda as soon as next week."
Boston Fed President Eric Rosengren discussed this in a speech last year:
"My own personal assessment is that as long as inflation and inflation expectations are expected to remain well-behaved in the medium term, we should continue to forcefully pursue asset purchases at least until the national unemployment rate falls below 7.25 percent and then assess the situation.

I think of this number as a threshold, not as a trigger – and the distinction is important. I think of a trigger as a set of conditions that necessarily imply a change in policy. A threshold, unlike a trigger, does not necessarily precipitate a change in policy."
Based on the current FOMC projections of the unemployment rate, this threshold would not be reached until some time in 2014. I don't expect QE thresholds to be announced this week, but this might happen later this year.

Me, Me, Me

by Bill McBride on 1/27/2013 10:32:00 AM

After this ... enough about me! From Alejandro Lazo at the LA Times: Blogger keeps finger on pulse of housing market. An excerpt:

These days, Calculated Risk has become a go-to source for Wall Street, the media, academics and anyone else looking for authoritative analysis of housing and the broader economy. When McBride makes a prediction — as when he called a housing bottom early in 2012 — the housing world takes note.

"If you only follow one economics blog, it has to be Calculated Risk," said James Hamilton, an economics professor at UC San Diego. "If you find yourself reaching a different conclusion from Bill about where the economy is headed, my recommendation is think again."

Although many economics blogs have ideological slants, Calculated Risk established a reputation as an objective source of commentary on an increasingly politicized topic. The blog's name — borrowed from that of a friend's boat — accurately implies an impartial, yet edgy, take on the economy.

But McBride himself has remained somewhat a mystery. Even while promoting his work, McBride shunned the spotlight personally. He wrote anonymously during the first years he blogged, which only heightened interest among a growing number of followers.

"He was one of the first people to stand up and, objectively, just by brutally falling back on the facts, just say that the emperor didn't have any clothes," said longtime reader Stan Humphries, Zillow.com's chief economist. "It was this deep mystery about who this guy actually was. I remember the first time I went and met him, it was like meeting Batman."
On Friday, from From Nick Timiraos at the WSJ: Six Housing Forecasters Who Got Things Right in 2012
After correctly calling the top of sales activity in 2005 and prices in 2006, [McBride] proclaimed last February that the “housing bottom is here” in a blog post that laid out all the dirty details. “I’ve tried over the years to call the turns when they arrive. I’m trying to call it when it happens and not wait six months or a year,” said Mr. McBride in an interview last February.
Saturday:
Summary for Week Ending Jan 25th
Schedule for Week of Jan 27th

Saturday, January 26, 2013

Unofficial Problem Bank list declines to 825 Institutions

by Bill McBride on 1/26/2013 07:18:00 PM

Here is the unofficial problem bank list for Jan 25, 2012.

Changes and comments from surferdude808:

As anticipated, the FDIC released its enforcement actions through December 2012, which led to several changes to the Unofficial Problem Bank List. For the week, there were six removals and five additions leaving the list at 825 institutions with assets of $308.9 billion. A year ago, the list held 958 institutions with assets of $389.0 billion. For the month, the list was down by 13 and $4.1 billion in assets after two failures, four unassisted mergers, 15 action terminations, one voluntary liquidation, and nine additions.

First National Bank, Hays, KS ($79 million) found a merger partner to get off the list. The FDIC terminated actions against Farmers & Merchants Bank, Lakeland, GA ($597 million); Border State Bank, Greenbush, MN ($338 million); Stoneham Savings Bank, Stoneham, MA ($326 million); Paragon Bank, Wells, MN ($30 million); and Peoples State Bank of Madison Lake, Madison Lake, MN ($24 million).

The FDIC issued actions against Bank of Washington, Washington, MO ($853 million); Community First Bank, Inc., Walhalla, SC ($463 million Ticker: CFOK); Central Bank, Savannah, TN ($160 million); Mountain Valley Bank, Dunlap, TN ($99 million); and US Metro Bank, Garden Grove, CA ($88 million Ticker: USMT). Also, the FDIC issued a Prompt Corrective Action order against First South Bank, Spartanburg, SC ($336 million Ticker: FSBS).

Next week should be a quiet one for the changes to the list.
Earlier:
Summary for Week Ending Jan 25th
Schedule for Week of Jan 27th

Schedule for Week of Jan 27th

by Bill McBride on 1/26/2013 01:48:00 PM

Earlier:
Summary for Week Ending Jan 25th

This will be a very busy week for economic data.  The key reports are the Q4 advance GDP report to be released on Wednesday, and the January employment report on Friday.

Other key reports include Case-Shiller house prices for November on Tuesday, the ISM manufacturing index on Friday, and auto sales on Friday.

There is an FOMC meeting on Tuesday and Wednesday, with an announcement scheduled for Wednesday at 2:15 PM ET. No significant changes are expected.

----- Monday, Jan 28th -----

8:30 AM: Durable Goods Orders for December from the Census Bureau. The consensus is for a 1.6% increase in durable goods orders.

10:00 AM ET: Pending Home Sales Index for December. The consensus is for a 0.3% decrease in the index.

10:30 AM: Dallas Fed Manufacturing Survey for January. This is the last of the regional surveys for January.  The consensus is a decrease to 4.0 from 6.8 in December (above zero is expansion).

----- Tuesday, Jan 29th -----

Case-Shiller House Prices Indices9:00 AM: S&P/Case-Shiller House Price Index for November. Although this is the November report, it is really a 3 month average of September, October and November.

This graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indexes through October 2012 (the Composite 20 was started in January 2000).

The consensus is for a 5.8% year-over-year increase in the Composite 20 index (NSA) for November. The Zillow forecast is for the Composite 20 to increase 5.3% year-over-year, and for prices to increase 0.4% month-to-month seasonally adjusted.

10:00 AM: Conference Board's consumer confidence index for January. The consensus is for the index to be unchanged at 65.1.

10:00 AM: Q4 Housing Vacancies and Homeownership report from the Census Bureau. This report is frequently mentioned by analysts and the media to report on the homeownership rate, and the homeowner and rental vacancy rates. However, this report doesn't track other measures (like the decennial Census and the ACS) and this survey probably shouldn't be used to estimate the excess vacant housing supply.

----- Wednesday, Jan 30th -----

7:00 AM: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.

8:15 AM: The ADP Employment Report for January. This report is for private payrolls only (no government). The consensus is for 172,000 payroll jobs added in January.   Even with the new methodology, the report still isn't that useful in predicting the BLS report.

GDP Forecast 8:30 AM: Q4 GDP (advance release). This is the advance release from the BEA. The consensus is that real GDP increased 1.0% annualized in Q4.

This graph shows the quarterly GDP growth (at an annual rate) for the last 30 years.

The Red column (and dashed line) is the consensus forecast for Q4 GDP.

2:15 PM: FOMC Meeting Announcement. No significant announcement is expected.

----- Thursday, Jan 31st -----

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to increase to 350 thousand from 330 thousand last week.

8:30 AM ET: Personal Income and Outlays for December. The consensus is for a 0.7% increase in personal income in December, and for 0.3% increase in personal spending. And for the Core PCE price index to increase 0.1%.

9:45 AM: Chicago Purchasing Managers Index for January. The consensus is for a decrease to 50.5, down from 51.6 in December.

----- Friday, Feb 1st -----

Payroll jobs added per month 8:30 AM: Employment Report for January. The consensus is for an increase of 155,000 non-farm payroll jobs in January; there were also 155,000 jobs added in December. 

The consensus is for the unemployment rate to decrease to 7.7% in January.

Note: As usual, the January report will include revisions.  From the BLS: "the Current Employment Statistics (CES) survey will introduce revisions to nonfarm payroll employment, hours, and earnings data to reflect the annual benchmark adjustment for March 2012 and updated seasonal adjustment factors. Not seasonally adjusted data beginning with April 2011 and seasonally adjusted data beginning with January 2008 are subject to revision."

For the Household survey, from the BLS: "Effective with the release of The Employment Situation for January 2013, scheduled for February 1, 2013, new population controls will be used in the monthly household survey estimation process."

Percent Job Losses During RecessionsThe second employment graph shows the percentage of payroll jobs lost during post WWII recessions through December.

The economy has added 5.8 million private sector jobs since employment bottomed in February 2010 including preliminary benchmark revision (5.2 million total jobs added including all the public sector layoffs).

There are still 3.1 million fewer private sector jobs now than when the recession started in 2007 (including benchmark revision).

9:00 AM: The Markit US PMI Manufacturing Index.  The consensus is for an increase to 55.5, up from 54.0.

9:55 AM: Reuter's/University of Michigan's Consumer sentiment index (final for January). The consensus is for a reading of 71.5, up from 71.3.

ISM PMI10:00 AM ET: ISM Manufacturing Index for January.

Here is a long term graph of the ISM manufacturing index. The ISM manufacturing index indicated expansion in December at 50.7% (dashed line). The employment index was at 48.4% in December, and the new orders index was at 50.3%. The consensus is for PMI to be unchanged at 50.7%. (above 50 is expansion).

10:00 AM: Construction Spending for December. The consensus is for a 0.8% increase in construction spending.

All day: Light vehicle sales for January. The consensus is for light vehicle sales to be at 15.3 million SAAR in January (Seasonally Adjusted Annual Rate) unchanged from the December rate.

Vehicle SalesThis graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the December sales rate. 

Edmunds.com is forecasting:
Edmunds.com ... forecasts that 1,045,587 new cars and trucks will be sold in the U.S. in January for an estimated Seasonally Adjusted Annual Rate (SAAR) of 15.3 million light vehicles. The projected sales will be ... a 14.5 percent increase from January 2012.